Lately, there has been a lot of noise on the internet regarding student debt. In a recent post on Forbes magazine's website, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the U.S. alone. Student loan debt is now the second highest consumer debt category - behind only mortgage debt - and higher than both credit cards and auto loans. Borrowers in the Class of 2017, on average, owe $28,650, according to the Institute for College Access and Success. Given that too many people have borrowed too much money that they can't afford to pay back, it got me thinking about student loans, the debt that these students owe, and how to deal with this mountain of debt.
As I see it, the problem with student loan debt is:
- It was guaranteed by the government.
- It could not be discharged in bankruptcy.
- It was issued without regard to whether a borrower's education would result in a job that could pay off the loan.
- It was a demand side education subsidy, and not a supply side subsidy.
- It was a major commitment made by people usually too young to understand the nature of that commitment.
Contrast
issues #1, #2 & #3 with car loans and mortgages. These loans are
secured by property, they can be discharged in bankruptcy, and the
person's ability to pay is factored into whether the loan is issued or
not. Given that the price of an education is in the same league as both
a car loan and mortgage, shouldn't similar lender and borrower
protections and privileges be in place? Why should the government be
guaranteeing the loan and not allowing it to be discharged in
bankruptcy?
Economics 101 says that if you want
prices to go up, increase demand by throwing money at the consumption
side of the equation. By making more money available for education
without expanding the supply of "top tier" schools, students will either
pay more for the same education, or buy an education of dubious
quality. This is evidenced by the inflation of prices charged by good
schools for an education, and the proliferation of scam, for-profit
schools providing poor quality education to people who couldn't qualify
to get into the good schools.
Lastly, with issue #5,
we expect young adults, who are barely 18 at the time, to make the most
important economic decision of their lives without much of a safety net
(see issue #2 & #3). We keep the same student from buying a drink
in the USA until s/he is 21. And having one underage drink is less of a
life changing decision than choosing a school and borrowing the money
to pay for the education.
I suggest to fix this problem, we need to do the following:
- Eliminate government student loan guarantees.
- Allow all student loan debts to be discharged in bankruptcy.
- Require that all lenders perform an analysis of whether the student's
school and field of study will result in a job which allows the student
to comfortably pay off the loan. They will be the risk holders, so the
banks should have the right to determine who gets their loans.
- Government subsidies to education should only be towards the expansion
of the school system and for the development of new, highly qualified
teachers for that system.
- Require young adults to
work for 2-3 years before applying for a student loan. These loans
should not be issued to people under 21 years old.
- Minimum standards for all schools must be set by a non-profit entity,
and no student loans be issued to institutions not meeting this
criteria. Graduation rates and Job Placement rates must be set high
enough, so that scam, for-profit schools can not make money off of
student loans.
This is a start for a longer thought
experiment. But it applies real world, market principles to fix the
system. However, it doesn't address what is needed for the students who
have been victimized by the present dysfunctional system. For them,
immediately addressing issues #1 and #2 should move things forward
towards a market based system of funding higher education.
But how do we chip away at this mountain of debt incurred prior to making the above fixes without giving students a "free ride?" Just letting existing borrowers go into bankruptcy to clear this mountain of debt can have unintended consequences. I propose the following changes:
- Student loan debt incurred prior to the enaction of these changes will be converted into inflation indexed, interest free loans.
- These loans will be paid by a separate income tax whose rate mirrors the current employee social security contribution (currently 7.5% of income), but with no upper income cap.
- These loans will have a life span of no longer than 25 years. If they are not paid off in full, the Federal government absorbs all losses.
- A special inheritance tax of 10% will be imposed on all estates where the restructured loans have not been repaid out of former student incomes. Appropriate legislation may be added to deal with legatee hardship, such as medical bills.
I have not defined all the issues needed to resolve the problems caused by our current student loan crisis. However, this is a start - which is more than the legislative and executive branches of the Federal government have done lately....
It's hard to believe that the New York Stock Exchange once looked like this. The stock market was less regulated then, but never a place for a timid person to risk his/her money.
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One of the things I've said for years is that I believe in open, fair, and transparent markets. In an ideal world, these markets would be self regulating. However, powerful players love to distort markets via the use of rules, and via a lack of transparency. In the case of the stock market, most disputes are settled via arbitration - which is often rigged in favor of the large firm by the nature of familiarity. Precedents from one settlement are not applicable in the next case, so the large firms have an edge which is almost impossible overcome.
However, the lack of transparency affects more markets, and has an even greater effect. For example, the current practice of "Non-Standard" sizing makes it much harder for a person to "compare apples to apples" when determining the price of goods. In the case of a carton of Orange Juice, the standard 64 oz. size was shrunk by all players to 59.5 oz. - making it much harder for people to determine what the real price was. Also, the shrunken size went less far, so the customer had to buy more containers to sate their needs for Orange Juice. Something similar happened in the size of Tuna cans - a few years ago, the standard size was 6 oz. - now it's 5 oz.! No one asked the consumer (in these terms) whether we wanted to pay the same money for smaller size packages, or more money for the same size packages. If they did, the marketplace would have chastised the sellers of these goods - something they avoided by obfuscating their price hikes with package size changes.
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Right now, people are starting to see a crisis with student loans. This is another example of marketplace interference creating disastrous effects. A little over 150 years ago, it was "easy" for a person to attend some of the nation's most prestigious universities. All they had to do was learn the "basics" - which included Latin, and other skills no longer needed in the real world - and then pay the bills for school - which weren't that expensive. However, after World War 2, the GI Bill made it easier for students to afford college - and a college education was seen as the ticket to middle class success. Years later, our nation's policies changed to provide poor people with grants to go to college, trying to create a more diverse student base in these schools. And then came the age of college loans - which I see as a total disaster. Instead of increasing the supply of college seats (which would have reduced prices and increased availability), policy simply increased demand for college seats by making student loans cheap, easy to get, and with no demand that a student comes out with a salable skill. The only effect here was to raise the price for seats in a good school.
What happened to the students? Many got saddled by debt, studying in majors that would not prepare them for jobs in the outside world. When a student owes money on a student loan, it is almost impossible for it to be discharged in bankruptcy. As a result, the interest on the debt makes the student loan virtually impossible to pay off.
But what would happen if we eliminated the Federal guarantee of payment? What if these loans could be discharged in bankruptcy? Well, many of the private lenders would cease lending money, marginal students would stop going to college, and colleges might be forced to lower their prices for study. The powers that be don't want that. The banks making a lot of these student loans would cease making loans - and making guaranteed profits.
I posed a question to a couple of people and got the same negative response - therefore I know I'm on to something.... What if (1) there were no guarantees of student loan repayment by any level of government, and (2) a student loan lender could insist that a student loan borrower major in a field likely to result in a job? Both people said that this would be wrong - the student has a right to study what he/she wants to study. But at whose expense? The student is usually way too immature to make many decisions which will impact the rest of his/her life. Part of college's function in society should be more than that of a trade school - it should teach a person how to think, and how to look at life with a long term perspective. One of these people said that if he were to take out a bank loan for a car, that the bank has no right to tell him what car to buy. Yet, one could counter - that if a car manufacturer's finance arm offers you the loan on the car, it should have the right to tie you into buying one of their cars.
In short, the lack of a efficient market (with rules for proper debt discharging) for funding higher education has caused a crisis in higher education that also affects non-students. If a former student is saddled with too much student debt, that same person may not be able to afford getting married and having children. And if this person has children, he/she may not be able to pay enough in school taxes to educate the children - a long term risk for society.
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Not all problems in society can be resolved by market forces. Other methods must be used to limit consumption of resources. Great Britain spends about 35% of what America does on health care, and has a roughly equivalent standard of national health. Canada spends about 50% of what America spends. And other developed nations are in the same league. What is different? They all recognize that health care doesn't work with a marketplace model. So, instead, they ration care in ways that Americans would consider unacceptable. Britain uses results based medicine, and when in doubt, chooses the cheapest alternative. There is a waiting line for almost everything except acute emergency care - and even then, there are rules and regulations that apply - as if one were part of a giant HMO.
I do not advocate the British or Canadian models, because they err in ways Americans would not accept. But the German and French models have a lot to offer - if only we would examine them more closely.
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Americans like the idea of free express roads that take them from town to town, and city to city. There is one big problem - the price - FREE. This has encouraged the growth of the trucking industry over that of the railroads who pay for the upkeep of their track. One might say that truckers pay gas taxes that should maintain the roads. But in many states, especially in the South, these gas taxes have not been raised in years, nor have they been indexed to inflation. As a result, we're seeing part of our transportation infrastructure neglected by lack of proper funding, and now at great risk - as many structures are at the end of their life spans.
What happens when people have to pay to use a road? People actually think - do they need to make this trip? And this is an important question, as it reflects a market helping to shape a behavior. There is a discipline that takes place in a well functioning market. The trick is to design a market well, regulate that market well (but minimally), and make sure that only the right things are governed by that market.... This, as I see it, is the big challenge of the 21st century.
It never fails to surprise me about how little people retain from each day's news cycle. A few weeks ago, Obama's warming up towards Cuba was big news - and the "conservatives" were all chastising him for abandoning tactics which have been proven not to work. The same thing was done with Iran - and again, it was big news for a few days, and almost forgotten. We're seeing public opinion swayed by talking heads, in ways that George Orwell could only dream of....
Orwell, in "1984", presented a public speech where someone was ranting about one enemy, and in the middle of the speech the enemy changed. The former enemy was now a friend, and the former friend was now an enemy. Although this type of change isn't happening as fast as in Orwell's novel, we're already seeing this in our media. How many of us remember when our enemy was "godless" communism? And now our biggest trading partner is the People's Republic of China - governed by the Communist Party.
Although George Washington warned us against having any permanent entanglements, I don't think that he would believe how quickly the world changes in our lifetime. My father has seen Germany and Japan go from being friendly countries, to enemies, and back to being friends. And in my lifetime, I've seen the same happen with Vietnam, and am seeing it happen with Iran and Cuba.
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About 50 years ago, the city of Baltimore had its riots. And now, it had another round of riots. The problems are the same as they were 50 years ago - a general lack of economic opportunity. Americans will forget about this round of riots, as they have other important things in the news. But will we learn from them?
This time, we're seeing people around the world "armed" with cell phones (most of which contain the latest software) and active internet connections. Even in Iran's riots of a couple of years ago, the central government was unable to suppress all the news from getting out of the country. It couldn't suppress the news being passed along by its citizens. And the same thing happened here - the Baltimore Police could no longer cover up what triggered the riots - a "thug" whose rights were ignored by the police, and a death that couldn't be ignored.
Now, I've just used the word "thug" to describe this person. But is he as bad as the label I've attached to him? In an area as economically depressed as his section of Baltimore, over 56% of the adult male population is unemployed. Dr. Phil noted in an interview on Fox News that the people living in these poor sections of cities may have the same potential, but not the same opportunities, education, or inter-generational social pass-throughs. Was this person's rap sheet caused by a defect in this person's character, or was it caused by the environment he lived in?
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Two generations ago, we didn't need to worry about the problems of structural unemployment. Today, both people in the inner city and the suburbs are affected by these problems. The low end jobs which were stepping stones to greater opportunities no longer exist. Low value/High Labor cost manufacturing left the United States years ago. Computers have replaced humans in many tasks which would have provided work - the computer managed "help lines" we call are perfect examples of this. It is cheaper to have a human interface with a series of telephone menus than to reach a real, live, flesh and blood human. And society no longer provides the full and free education needed to fill the jobs of tomorrow.
Our college education system has been corrupted by government funding - instead of having our government expand access to college by building more colleges, we've seen our government increase the monies available to students in student loans. Simply adding more money to buy more education doesn't do much good - it only raised the nominal price of an education, making it much harder for both the poor and the middle class to afford college. And for those that got the student loans, they often now have onerous debt to repay, and are deferring having children. (I'm not even talking about those who took out predatory student loans issued by for-profit colleges that provided sub-standard educations - these students were screwed the day they entered school, and no one wants to fix this problem because the affected students come from the lower castes....) Since student debt can't be erased in bankruptcy, we now have a generation of Americans who will not be able to afford what will be needed from them in the future.
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It is very interesting is that the problems that once only afflicted the lower class are now affecting the middle class. Poverty used to be clustered in the inner city and in remote rural areas. Now, we're seeing newly poor people scattered through middle class neighborhoods. Houses are becoming derelict because of predatory lending combined with "Zombie Titles" that insulate banks from maintaining foreclosed properties - Banks are no longer foreclosing on many properties, making it impossible for borrowers to walk away from debt that they can no longer afford. Sadly, this may only be the tip of the iceberg when it comes to what the banks will be doing next to preserve their power in society....
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Where will we end up? I don't know. I'm afraid for our future, as we're seeing the signs of America's upcoming collapse - and we, as a whole, have a lot of questions about our society's future that need to be asked and need to be answered. So far, all our leaders are doing is pandering to us and our fears - they do nothing to deal with the real problems. And this is a great danger that we all should fear....
